8 Takeaways on Russian Oil and Gas from Putin’s Q&A marathon

putin

Russian President Vladimir Putin held his annual end of the year press conference, fielding questions from journalists in a 3-hour Q&A session.

The full text can be found on the Kremlin’s website.

He answered questions from 32 journalists on a variety of topics, from the run-of-the-mill topics such as the economy , Russia’s diplomatic spats, to the bizarre themes, such as suggesting FIFA’s Sepp Blatter deserves the Nobel Peace Prize or endorsing Donald Trump for president.

But at Neftianka, we blog about oil and gas, so we compiled everything Putin said at this year’s press conference about Russian energy.

1. $50 per barrel oil is too optimistic

“Our calculations [for the 2016 budget] were based on the oil price of $50 a barrel. Now the price is $38. We will have to correct something there,” Putin said on Thursday.

Low oil prices have wreaked havoc on the Russian economy, which is expected to contract 3.7% this year. Putin says the forecast for economic growth of 0.7% in 2016, and 1.9% in 2017 are based on $50 per barrel oil prices.

2. Does the Russian government plan to privatize part of Rosneft, the country’s biggest oil company?

“This (large-scale privatization) is possible, and in principle we will continue this work,” Putin said, adding he wasn’t sure that the market conditions are currently optimal.

The Russian government owns a controlling stake in many of the country’s major oil and gas companies: Gazprom, Rosneft, and Bashneft to name a few. Many industry experts argue this makes them inefficient and subject to state interests, while others argue without government support, they would be worthless.

In 2012, the Russian government (which is headed by the Prime Minister, Dmitry Medvedev) announced their plan to sell off 12 large state-owned companies, including Rosneft.

Russia’s current Finance Minister, Anton Siluanov, supports the privatization of Rosneft, and said it could happen as soon as next year.

3. TurkStream

Negotiations on TurkStream, which was meant to replace the canceled South Stream, have been on hold since the downing of a Russian fighter jet over Turkish territory last month. The pipeline would have initially have had the capacity to transport 63 billion cubic meters of natural gas from Russia to Turkey under the Black Sea. The project, which would send a majority of the gas onto Europe and fill the gap of the failed South Stream, was slated to be finished as early as 2016.

At present, negotiations are stalled.

“We haven’t stopped on negotiations. We need written guarantees from the EC that the routes will be made a priority. But so far, we see nothing of that sort, and will not take any step that isn’t in our economic interest,” Putin said.

4. Nord Stream II

The expansion of Nord Stream, a pipeline that transfers Russian gas directly to Germany, would quickly and easily solve Gazprom’s dependence on delivering supplies through Ukraine.

Once expanded, the pipeline, which runs along the seabed of the Baltic Sea, will have the capacity to deliver 110 billion cubic meters of gas, or about 2/3 of Europe’s total yearly demand. Gazprom will build and operate the pipeline with Germany’s E.ON, BASF/Wintershall, Austria’s OMV, ENGIE of France, and Royal Dutch Shell to expand the pipeline.

However, the project has recently met opposition from some EU members who believe either 1) Germany will have too much power over natural gas or 2) it gives Russia too much control over EU energy affairs.

“Nord Stream and the future Nord Stream II were motivated by the demand for reliability, market-based operations, and high standards of legal and administration standards. If our Ukrainian partners do the same, we can work with them. If not we’ll look at alternatives,” the president said.

5. Ukraine transit

Nord Stream and TurkStream are meant to reroute Russia’s European gas exports away from Ukraine. Gazprom is pre-emptively expanding its energy network in Europe, because as of 2019 when its contract with Kiev expires, Russia may no longer send any supplies via Ukraine, its traditional conduit.

However, if TurkStream and Nord Stream continue to face obstacles, transit through Ukraine may continue.

“On a corporate level, during heated debates I personally heard someone saying we will stop the transit … I am not sure that we should cut transit through Ukraine,” Putin said.

6. South Stream

Before TurkStream and Nord Stream II, Gazprom originally planned to use the South Stream pipeline beneath the Black Sea to send its gas to Europe. The project was halted in mid-construction, because the European Commission and Russia couldn’t agree on terms.

“You know our views, we were ready to implement this project, but we weren’t allowed to. We were surprised by Bulgarians (who could have got $3 billion, plus 400 million euros in transit fees per year) who are acting against their economic interests.”

7. Yamal LNG

Putin is confident that Yamal LNG project will go ahead, despite major delays in future finance. The project is a joint operation by Russia’s Novatek, France’s Total, and China’s CNPC to ship liquefied natural gas from Russia to global markets.

“This is a needed project. Sales of LNG will grow and today, we are selling energy in the Far East, or on swap agreements (done by Gazprom), but this is a huge Chinese, French, Russian joint project that can go to all the foreign markets,” Putin said.

Putin also added that the port could become universal, and ship other various goods in addition to LNG, including cargo.

Only $10 billion of the $27 billion Yamal LNG project has been financed, and next $20 billion needs to be externally financed, mostly from Chinese Banks and the Silk Road Fund.

“Question of budget financing needs additional analysis,” was Putin’s response.

8. What about exploring new fields?

A majority of Russian oil comes from well-developed fields in Western Siberia, where resources are fast depleting, and industry experts companies aren’t prepared to fill the future production gap.

Exploration of new oil fields in Russia never stopped since the Soviet times, according to Putin, because, “nobody wants to kill the goose that lays the golden egg.” The Russian government stimulates exploration by both state-owned and private companies, Putin said.

The Iran Factor

Image from International Business Times
Image from International Business Times

Iranian oil only costs $10 per barrel to produce, so it’s no wonder foreign companies are clambering to participate in oil and gas projects. The cheap oil, along with the eagerness of foreigners to get involved in projects, will allow Iran to quickly regain its market share in the industry, and disrupt other countries along the way.

Talk of Iran’s reemergence into the global oil market started to surface in April, when Tehran, the US, and five other countries, announced a preliminary agreement to limit Iran’s oil program, and in exchange, end sanctions. However, the deal is likely to be delayed into next year, as the US Congress is stuck in gridlock on whether to support or nix President Obama’s initiative.

Sanctions linked to Iran’s controversial nuclear program have barred it from developing or exporting oil or gas in recent years. Iran’s oil exports have dropped from 2.5 million barrels a day in 2011 down to just 1 million barrels in 2014, according to the US Energy Information Administration (EIA). Iran has between 20-30 million barrels of crude in storage that could potentially come to market whenever sanctions are fully lifted.

Iran presented 70 oil and gas projects to 137 foreign companies at the Iran Petroleum Contracts Conference in Tehran on November 28. Companies included BP, Enel, Eni, Repsol, Royal Dutch Shell, Statoil, Total, Gazprom, Lukoil, and Rosneft. Though US giants ExxonMobil and ConocoPhilips weren’t represented at the conference, the oil minister Bijan Namdar Zangane said he welcomes American participation.

Iran is aiming to bring in $25 billion in investment, and that by 2020, oil and gas project financing is expected to reach $185 billion, Zangane said.

Managing Director of National Iranian Oil Company, Roknoddin Javadi, said he hopes that the first oil contracts are signed at the beginning of 2016.

Before, Iran had lost the interest of foreign companies due to a particular negotiating point that the foreign contractors would have only been able to develop and operate the oil fields, not own outright. Now, Iran has amended this buyback model, but on the condition an Iranian company owns 51% of the project.

The new contracts Iran is offering are 15-20 and will give investors the opportunity to recoup their costs, instead of risking big losses. They will also have the option to extend contracts for an extra five years, up to 25 years.

An OPEC member, Iran’s current production is 3.1 million barrels per day and hopes to boost production to 5.7 million barrels a day by 2018, according to Zanganeh.

Many analysts have already gone into much greater detail on this, but the entrance of Iranian oil (whenever that may be) will affect world production and distribution. If Iran ramps up its production like it says it will, this will only add to the current global supply glut of oil, and further drive down oil prices. To Saudi Arabia’s delight, this will put a lot more North American shale companies out of business. Iran could undercut Russia in supplying the European market.

Will Europe be Successful in Killing Nord Stream II?

Credit: Dresser Rand
Credit: Dresser Rand

On November 30 ministers from central and southeastern European countries sent a letter to the European Commission to state they believe the expansion of Nord Stream is a threat to European regional energy security.

The document was signed by Hungary, Romania, Estonia, Latvia, Greece, as well as the initiators, Poland and Slovakia. At the last minute the Czech Republic and Bulgaria decided not to sign the letter, Reuters reported.

“Nord Stream 2 would be, above all, detrimental in geopolitical terms . . . for the purpose of exerting more political pressure and applying blackmail on the EU, its eastern member states and its eastern neighbors,” Polish MEP Jacek Saryusz-Wolski said, quoted by FT.

Earlier in September, Gazprom finalized a deal with Germany’s E.ON, BASF/Wintershall, Austria’s OMV, ENGIE of France, and Royal Dutch Shell to expand the pipeline. Gazprom will own a 51 percent stake in the project.

The expansion could increase the current pipeline’s capacity to deliver 110 billion cubic meters annually, or about two-thirds of total EU annual energy demand. The direct Russia-Germany pipeline will cut out Ukraine as a transit state, which could cost Kiev up to $2 billion per year, arguably money the country desperately needs.

This would give Russia and its main gas supplier Gazprom an even tighter grip on the European gas market, the signatories argue.

At present, a double pipeline runs along the seabed of the Baltic Sea and currently delivers about 24 bcm of gas to mostly German buyers. The expansion will broaden that list to include Dutch, French, Danish, and potentially British buyers. In 2014, Europe imported 146.6 bcm of Russian gas, and by 2020, Gazprom predicts imports will increase by more than 200 billion cubic meters.

In theory, Nord Stream offers direct and reliable transport of gas between supplier (Russia) and buyer (Europe), however with politics in play, the story gets more complicated. The South Stream project, intended to run through Bulgaria, Slovakia, and other eastern and central European countries, was blocked by the European Commission on the grounds it violated anti-monopoly laws.

The two expansions of Nord Stream are expected to be complete by the end of 2019 and 2020, and will cost around €10 billion, according to Gazprom CEO Alexey Miller.